In June this year and following a period of consultation with various professional bodies, H M Revenue and Customs (HMRC) issued a special edition of their Tax Bulletin setting out their views on the tax and accounting treatment of the Single Payment Scheme.
As the new payment regime is not linked to production (i.e. is “decoupled”), a farmer can decide to cease production completely and still receive support payments. However in order to qualify for the payments, certain cross compliance conditions must be met. These conditions include animal welfare requirements, good farming practice and environmental requirements.
Income Tax
The single payments (SP) are in most cases fully chargeable to income tax, exceptions would include charities. A traditional farmer would include the income in his trading account as would anyone occupying the land for business purposes other than farming, for example an equine business. However where the payments are received and the land is not occupied for business purposes, the payments are not treated as trading income but remain fully taxable.
Capital Gains Tax (CGT)
The Payment Entitlements (PE) are chargeable assets for capital gains purposes and are separate assets to the land. Allocated entitlements will have a nil base cost for capital gains and their income tax treatment will generally determine whether they qualify for capital gains tax business taper relief or the less generous non-business taper relief.
Where a transaction involving the disposal of future entitlements was carried out before 1 January 2005, it will be treated as a disposal of a future entitlement and will not qualify as a business asset.
Where the qualifying conditions are met, the sale and transfer of PE will qualify for capital gains tax rollover and holdover relief.
Inheritance Tax (IHT)
PE will not qualify for Inheritance Tax Agricultural Property Relief for IHT as it is not an asset included in the definition of “agricultural property”. However where the owner is carrying on the business of farming or some other commercial business, Business Property Relief (BPR), should be available.
Value Added Tax
SP does not represent a sale for VAT purposes and is therefore outside the scope of VAT. However where it is transferred, there will be situations where VAT is chargeable.
In some situations, the PE will be transferred as part of a “going concern” and there will be no VAT to pay, in other situations, for example a sale without land, VAT will be payable.
The VAT position needs careful consideration before a transfer takes place.
Copyright Bentley Jennison, January 2006
